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Kepler Cheuvreux downgrades BG Group on uncertain outlook

Broker Kepler Cheuvreux has lowered its recommendation for BG Group from 'hold' to 'reduce', saying that uncertainties are clouding the outlook for the oil and gas firm despite its industry-leading growth potential.

Although BG has warned that 2014 production will come in at the lower end of the guided range and Kepler has cut its output estimates for this year and the next, the broker said the group "still offers one of the strongest volume growth stories in our universe".

Over 2012-18, Kepler predicts a compound annual growth rate of 5% at BG compared with just 2.7% for the wider sector.

As such, he said he is still "cautious" on when BG will turn free cash flow positive given the future shape of its investment programme. BG has previously targeted a free cash inflection point in 2015, while Kepler expects this to happen in 2016.

Meanwhile, Oppitzhauser said that recent resignation of Chief Executive Chris Finlayson and the stock's current valuation levels add to short-term uncertainties, given that both factors "leave the company vulnerable as a potential M&A target, we think".

"Taking the above uncertainties into account, we believe the risk/reward profile is now skewed to the downside and thus downgrade to 'reduce'," he said.

The broker has maintained a 1,200p target price for the stock, which was trading 0.1% lower at 1,212p by 12:51 on Tuesday.

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